Introduction To Spread Betting
Spread betting is commonplace in the sporting world because many sports lovers have adopted this alternative form of betting to enhance their enjoyment of their favorite sports and to give themselves further opportunities to make money from their predictions.
However it is also growing in popularity all the time in the forex industry as well because people have discovered that this is actually a simple way of trading the markets, and is relatively easy to understand.
There is no need to worry about lot sizes or anything like that. You simply find the currency pair that you wish to trade, choose your stake size, £1 or £5 per point, for example, and then enter your position long or short.
If the pair moves 100 points in your favor, you will bank 100 x your stake, and the more correct you are about your prediction, the more money you will make.
Potential Dangers
I have probably made it sound really easy to make money, but just like ordinary forex trading, you can also rack up losses really quickly if a position moves against you.
This is particularly true if you are using a stop loss that is a long way from the entry price, or if you are not using any kind of stop loss at all.
It is not unheard of for a major currency pair to move 100 pips per day, and so if you were to open a long position on one of the major currency pairs for £10 per point at the start of the day and let it ride with a 100 point profit target, for example, you could easily be looking at a running loss of £1000 if your prediction was wrong and the price dropped sharply.
Furthermore, if you were to leave the position unattended and failed to realize that there was an important economic announcement scheduled for that day or an interest rate announcement due, you could easily see the pair rise or fall 200-400 points immediately afterwards, and if it went against you, this would equate to a running loss of £2000 – £4000 in monetary terms.
How To Determine Your Risk
It is therefore important that you think very carefully about your position size before you enter any trades, and always employ a tight stop loss to avoid any heavy losses and protect your capital.
The general advice is that you should never risk more than 2-3% of your overall trading capital on any one trade.
So if you were to have £10,000 sitting in your spread betting account, you shouldn’t be risking more than £300 on your next trade. This is the maximum loss that you are prepared to accept if your stop loss is triggered.
Therefore if you use a strategy that looks for a gain of 150 points and employs a stop loss of 50 points, you can easily calculate that your maximum stake per point is £6 in this case (300 / 50).
In a worse-case scenario, the position moves 50 points against you and you have lost 50 times your stake of £6 per point, ie £300, which is just 3% of your overall trading capital, but if your trade goes to plan and moves 150 points in your favor, then you have made £900 profit (150 points x £6 per point), equivalent to a 9% profit.
Alternatively, if you are more of a short-term trader who looks to make 20 points profit per trade, with a stop loss of 10 points, you could open a position for as much as £30 per point because you would still only be risking £300 if the trade goes against you and your stop loss is taken out.
Final Thoughts
Hopefully you can see the importance of using sound money management principles when spread betting the forex markets.
It is estimated that around 95% of people lose money lose money from spread betting, and I think one of the main reasons why is because they eventually end up risking too much capital per trade (particularly after going on a losing run), and don’t use sensible stop losses.
By only risking 3% per trade, you will avoid any potential blowouts, and can continue to make decent returns for years to come with a half-decent trading strategy.
(If you are looking to open a spread betting account, Ayondo Markets offer spread betting and CFD trading on stocks, indices, currencies and commodities, and are fully regulated by the FCA.)
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